Bitcoin For Dummies - Bitcoin 101

Bitcoin, in its simplest definition, is a cryptocurrency that is not controlled by banks, organizations, the government, or an individual person.

The open-source, peer-to-peer payment network was introduced in January 2009 by Satoshi Nakamoto, which is said to be a screen name of the designer and creator of the original Bitcoin software Bitcoin-Qt.

Benefits of CryptoCurrency

Low inflation risk - Inflation is the biggest risk with existing fiat currencies used around the world. Over time all currencies lose purchasing power primarily because governments keep printing more money through Central Bank Actions. The total sum of all bitcoins will never exceed 21 milion Bitcoins. This will cause natural deflation as some people loose their coins via hard drive crashes etc. There will be roughly 1 Bitcoins for every 500 people.

Low collapse risk - Bitcoin is not regulated by any one government or central authority. It's a virtual global currency, and control is distributed through the entire network. Control lies in the collective power of all owners.

Safe, simple and cheap - Bitcoins can't be counterfited, you can store them on a computer, usb drive, or cloud host. Because there is low fraud risk, and no need for a central authroity, the transaction cost is almost zero for any size transaction.

Easy to carry - You can Carry a Million dollars or more on a USB drive. The challenge now is finding people or companies that will accept bitcoins.

Untraceable - This is actually slightly misleading and confusing. Bitcoin transactions currently can be comletly Anonomous, or 100% transparent. But by default they are not Untraceable, unless you take significant steps to hide your identity. This is one feature that will increasingly come under presser by governments.

Risks

Untraceable - This feature of Bitcoin of also attracts criminal activity like the Silk Road. People can buy and sell drugs and other illegal items with significantly less risk of being traced by authorities. Bitcoins in this regard are similar to regular cash which is used by criminals. This is not the default nature of the cyptocurrency, and many expect goverments to regulate this.

Easy to lose - If you send your hard drive to the dump, its gone! There is no mechanism to recover stolen or lost Bitcoins. If somebody hacks into your wallet where you store your Bitcoins you lost them for good. There are many ways that you can backup and protect the security of your bitcoins.

New & Hard to Understand - Its just hard for people to grasp. It's also possible that a competing crypto currency becomes more successful than Bitcoin or that everyone overlooked a major flaw in the system, or that goverments regulate it to death.

Can't buy stuff - Its still relativly difficult to use Bitcoin to buy a cup of coffee. This is all changing fast, as major retailers like Overstock.com are starting to accept payments in bitcoin.

Too volatile - Until volitility settles down it won't be a convenient currency. In the last year a single bitcoin has traded as .99 cents, and as high as $1200. On several occasions it lost 50% of its value in a single day.

Technical Detais

The electronic currency uses cryptography or secret codes in its creation, and in each transaction, to make sure that no counterfeit, inflated, or printed version of bitcoin goes into circulation.

Bitcoin is actually so Sexy that it has casued many to suggest that its actually in Bubble Territory.

You can use bitcoin on any computer or smartphone as it’s operating on a free and open-source software. There’s also no start-up or transaction fees in using bitcoin.

Bitcoin circulates around a decentralized network using specialized computers that verifies and timestamps every bitcoin transaction.

Who Are Using Bitcoin Commercially

The commercial use of bitcoin is still small compared to other currencies. But merchants are now slowly adopting the currency because of its cheaper transaction fees.

WordPress, Reddit, Namecheap, and OkCupid are some of the well-known online companies that have started accepting bitcoin as an alternative currency. Victoria's secret, and Overstock.com have announced plans to accept the new currency. There is a complete list of Companies that accept Bitcoin payments. Or visit Usebitcoins.info to see a list of businesses around the world who are using bitcoin.

How To Get Bitcoin

Coinbase.com is the easiest and most reputable place to buy bitcoins. Before anything else, you’ll need first to have a “wallet” to store all your bitcoin. You can download the bitcoin client Bitcoin-Qt, which works on Windows, Mac, and Linux machines.

On your Android phone, you can download Bitcoin Wallet on Google Play.

There are at least four ways to acquire your first bitcoin. One way is by getting them through someone who have bitcoin and pays you in exchange for a product or service.

You can also buy bitcoins at Bitcoin exchange sites like Mt. Gox. Or you can personally exchange coins with someone near your area.

Another popular way of acquiring bitcoin is through “mining”, which is a term for the production of bitcoin. As we’ve covered above, bitcoin circulates in a decentralized network of specialized computers. Operators of these machines are known as “miners”, who are given incentives like transaction fees and newly minted bitcoins for helping the network.

As of April 2013, there are already 11 million bitcoins in existence. Once the number hits 22 million, the mining or production of bitcoin will stop.

What Does The Government Think About Bitcoin

Because it can be swapped privately, bitcoin became a favorite currency for illegal activities, most notably, in the online black market known as the Silk Road. The FBI shut down the shady online marketplace in October 2013 and seized $28.5 million USD worth of bitcoin from the site’s alleged owner.

In November 2013, the price of bitcoin soared after the United States Senate made a positive note on the use of virtual currency systems.

Federal Reserve Chairman Ben Bernanke also said in a letter to the senators that virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system.”

In December 2013, the People’s Bank of China banned financial companies from using bitcoin, which prompted China’s internet giant Baidu to stop accepting bitcoin on their site.

Joining China in the campaign against bitcoin is the European Banking Authority, which warns European consumers from using the currency.

What Is The Future Of Bitcoin

Currently, bitcoin has some obvious limitations and risks, but the concept of an alternative to traditional fiat currencies is so appealing to many that some are making claims that it could bring about more change than the internet itself.

Utah-based Casascius.com is one such site that is selling real bitcoin coins. However, U.S. regulators shut down the site in November 2013.

Being unregulated, bitcoin will still have quite a challenge in reigning (legally) the online currency industry. As such, criminals are taking advantage of bitcoin’s current status. However, law enforcement authorities are positive that they may be able to track down criminals using bitcoin for illegal activities.

And just like the Internet, reception of bitcoin is still going to take more years. Once it does, it will also (perhaps) revolutionize the way we live; and create a perfect digital currency in the process.

By the way, 1 BTC is currently trading at an average of $880 USD (at the time of writing).

If you REALLY want to understand the details of Bitcoin, and you have 41.2 Minutes to spare Watch this Youtube Video.

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Watch out for the next post as I will post a more detailed guide on how you can acquire bitcoin and start using them online. Stay tuned.